Port Investments on Coastal and Marine Disasters Prevention: An Economic and

Policy Investigation

Anming Zhang / Sauder School of Business, UBCNovember 2014

* Joint work with Yi-bin Xiao (U. of Electronic Science and Technology of China), Xiaowen Fu (U of Sydney) and Adolf K.Y. Ng (U. of Manitoba)

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Introduction

• Located along shorelines, seaports are highly vulnerable to coastal and marine natural disasters

• … and more generally, coastal facilities and coastal cities

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1400-18001800-19001920-1940

1946-19601960-19701970-nowNear Future

Port of Rotterdam

Direction of Port Development

Port expansion: City center to coast

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• In Manhattan, Sandy’s surging tide darkening the city below Midtown. The new World Trade Center’s base is three feet above sea level.

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Coastal and Marine Natural Disasterscan be Very Costly

• Preliminary estimation: damage by Sandy could exceed $18 billion (NBCNews.com, 2012). Earlier, Katrina had caused damages worth $146 billion (National Geographic, 2012)

• Hurricane Sandy’s cost to marine insurers was estimated at $2.5-3.5 billion (Lloyd’s List No. 61,014)

• In addition to such “one shot” disasters, there is an increasing risk of coastal and marine natural disasters, owing to “climate change” (esp. rising sea level)

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Mark of the typical flood height in Chesapeake, Virginia. “It doesn’t take a major storm; heavy rain and the right wind during a high tide will do it.”

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• Damages associated with coastal disasters can be prevented or alleviated with proper investments in ports and coastal regions:– Raise height of roads (causeways); improve groins, dikes, levees and

seawalls; improve a port’s storm water system

– Example of “Terminal Groin” (a long wall or hardened structure that extends out toward the ocean, usually perpendicular to the coastline, and adjacent to an inlet or at the end of coastal land mass that is prone to

beach erosion)

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Projects may be long and costly

• The Saint Petersburg Flood Prevention Facility Complex costs $3.85 billion, started in 1979 and finished in 2011

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1953 North Sea Flood and Delta Works: finished in 1997

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Right after Sandy’s surge on New York City…

It was argued that a sea wall barrier could have stopped Sandy’s 14-foot storm surge

A “sea barrier” proposal has been proposed, with a price tag of $6 billion

In Gulfport, only days after Sandy hit NYC…

(and in fact, only 7 years after Katrina)…

$570 million in Federal Community Development Block Grant for post-Katrina restoration and expansion

Change 25-feet elevation to 12-15 feet for West Pier

$120-140 million can be saved for deeper water channels for “additional jobs and business”

Key factors in decision making

• From port commissioners:– “That’s based on 15 being something our contractor told us he could

reach in a relative quick period of time. Twelve or 14 being what some of our tenants said was comfortable for them.”

– “I personally feel that if we get our elevation up to somewhere around 15 feet that’s going to mean something to somebody that is bringing cargo to our port to be exported. I personally feel that if we get it up to 15 feet we’ll be in good shape.”

• Governor Phil Bryant: “Not to elevate the West Pier to 25 feet was a good decision. We should now concentrate on better serving current tenants, attracting new business and creating an additional 1,200 jobs.”

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Uncertain return on disaster-prevention investments

Investment offers benefit only in the case of disastersFudai, Japan

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Introduction (cont.)• In summary, port investment on disaster prevention remains

a challenging task:- Costly, and time-consuming- Lumpy, and irreversible- Disaster-specific

• Yet, whether disaster occurs, and its impact, remain uncertain, although the knowledge on them improves over time

• When should investment be made? – Later investment with better knowledge? or– Early investment with limited knowledge, but longer time to

recover the investment (buying insurance earlier)

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Introduction (cont.)

• Which factors influence the amount of investment?

• Most ports now adopt the “landlord port” model: The Port Authority owns basic infrastructure, land, and access and protection assets, and leases them out to operators, mostly on a long term concession basis, while retaining most, if not all, regulatory functions. Private operators are usually expected to finance their own superstructure and heavy equipment

• Allocation of investment responsibilities:

- Port Authority, or its tenants? Each believes that the other side should be responsible (“free ride” problem)

• Would government coordination help?19

The model

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Case 1: Investment in period 1 and individual decision-making

(1.1)

(1.2)

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where = financial damage to port and tenant

Damage reduction to the port =

Damage reduction to the tenant =

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(2)

Denote

(3.1)

(3.2)

(4)

(5)

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(6)

(7)

(10)

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Case 2: Investment in period 2 and individual decision-making

(11.1)

(11.2)

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(14)

(12)

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Case 3: Investment in period 1 and coordinated investment

(15)

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(17)

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(18)

(20)

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Case 4: Investment in period 2 and coordinated investment

(22)

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Invest earlier or wait?

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Proposition 1

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Is coordination always better?

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Proposition 2

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Proposition 2 (Cont’d)

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Proposition 3

ConclusionNow or wait?

•Immediate investment is optimal for disasters with high likelihood, whereas investment should be postponed if the likelihood is very low

•Optimal timing for cases of intermediate probability can’t be determined; it depends on other factors

Who should finance investments: Coordination or not?

•Positive spillovers between a port and its tenants lead to under-investment, which could be corrected by coordination

•Centralization is optimal for disasters with either low or high likelihood

Methodological:

How can the problem (including all the uncertainties associated with climate change) be handled analytically?

Insights also apply to investments in other types of vulnerable infrastructure such as power generation and distribution, commercial buildings and residences.

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